Retired Brigadier Kevin O'Brien,  a member of the trust's board for 10 years, says it would set a "very unhealthy precedent" and would not have happened if he had still been on the board.

He says a major reason for the Howard government delivering the former defence lands around the harbour into the trust's  hands was to protect them from residential development.

And he says the proposal to lease the site – a cluster of former defence buildings known as 10 Terminal – to an aged-care provider risks alienating the site in perpetuity because of the capital cost involved in converting it.

"They [the plan's advocates] will tell you that they are going to do a  ... [25]-year lease  but anybody with a business brain would tell you that this is predicated on something much longer. You will never get the people out. The business itself will never leave. I think we are effectively selling off prime Sydney real estate to an entrepreneur, that's what we are doing."

The proposal for an 89-bed facility is under active consideration by the trust and has to be approved by both its board and the federal Environment Minister, Greg Hunt. Mr Hunt is due to make a decision this week.

A spokesman for the trust rejected Brigadier O'Brien's broadside, arguing  there was nothing in the trust's act that conflicted with the site being used as an aged-care facility.

"The Harbour Trust's sites are unusual parklands because we have adaptively re-used the hundreds of former military buildings on [them] for contemporary uses that fit well in a parkland setting," the spokesman said. The lease would be "strictly for 25 years and has no right of renewal", the spokesman insisted.

However, Brigadier O'Brien says the residential aspect of the aged-care proposal makes it different to other uses being made of trust sites around the harbour. He says the 10 Terminal buildings have military historic significance and will be substantially restructured, not adapted.

The chief executive of the trust, Geoff Bailey, has been openly sympathetic to the aged-care proposal, recently telling Mosman Council, which opposes the plan, that the elderly would benefit from the "soothing quality of the natural setting".

Brigadier O'Brien, a military historian as well as former senior army officer, is the first former or present board member to speak out against the proposal. He said the defence department had historically occupIed the harbour headlands, particularly Middle Head and North Head, to protect Sydney from invaders.

"Of course we never got invaded but the fortuitous by-product was that we protected these lands from developers," he said. "This will set a very bad precedent."